An Essential Preliminary To Geographical Distribution Of Capital

IT is an indispensable preliminary to any really scientific estimate of the value of the principle of the Geographical Distribution of Capital, as a mode of investment, that we should at the outset ascertain what we may call the natural value of the different classes of securities on the market, with the view of determining the order in which, like geological strata, they lie one above another in the financial hierarchy. For just as it is necessary to know the natural order of the rocks composing the earth's crust before we can understand the topsy-turvy inversions and dislocations which local upheavals and depressions have here and there produced among them, so it is necessary to know the natural order and rank of the credit values of different species of stock if we are to take advantage of those inversions of their natural order which are always occurring in some of the countries of the world, where, like an inverted pyramid, stocks naturally highest in the scale are found lying far down towards the bottom, and those naturally at the bottom high up towards the top. Indeed, as we shall see farther on, it is on these inversions and dislocations, and on a knowledge of the causes which give rise to them, and, therefore, on the advantage that can be taken of that knowledge, that the principle of the Geographical Distribution of Capital gets its foothold and justification.

Definition Of Natural Value

I am aware, of course, that there is no such thing as a purely natural value adhering to any particular stock or piece of property whatever; for all, of course, depend on circumstances and conditions, on supply and demand, and the rest. What I wish the reader to understand by the natural value of a stock is the value which attaches not to any particular stock as such, but to the class of securities to which it belongs, whether this value be due to the possession of certain positive natural advantages, or negatively to the freedom from certain natural risks, or both.

As a rule, the natural value of a stock includes both advantages and risks; but it will be found that while some stocks get their rank mainly from their advantages, others get it mainly from their absence of risk. It is only when the two are taken together and a balance struck between them that the difference in natural value or rank of the stock, whether as higher, lower, or on an even level with other classes of stocks, can be said to be determined; as, for example, between Government stocks and Banking, Banking and Insurance companies; between these again and Corporation Loans or Railway Debentures, and between all these and the ordinary shares of industrial and commercial enterprise. But to ascertain this it is necessary to reduce them all alike, if possible, to some common denominator as it were, by passing them through a number of generalised categories which shall sum up their main characteristics, both of advantages and risks. They may be classified as follows:

The Difference In Rank Of Stocks. Advantages Of Stocks Classified

1. The extent, mass, permanence, and stability of the securities on which they rest.

2. The extent to which they rest primarily on Money and its range of fluctuations, and only secondarily on Industry; or primarily on Industry and its range of fluctuations, and only secondarily on Money.

3. The extent to which they rest on such previsions as are possible in the ups and downs of industrial business of all kinds on the one hand; or on calculations that fall under the mathematical Laws of Probability on the other.

4. The extent to which the element of Time enters into the composition of their business bargains.

5. The amount of natural Monopoly that attaches to them from peculiarities of their situation or surroundings, or owing to the mass of free Capital which they can concentrate on any business situation at any moment.

Risks Of Stocks Classified

The above have direct reference to the positive advantages of different classes of stock. But these once ascertained, we have still to turn the stocks over on to their negative or reverse side, as it were, for the purpose of ascertaining the extent, magnitude, and imminence of the risks to which they are exposed. These comprise:

1. The extent to which the risks are sudden and incalculable, or so foreseeable as to enable investors to prepare against them either wholly or in part. An altogether incalculable risk is, of course, a pure gamble, and not a proper subject for scientific investment, unless, indeed, it can be controlled by the mathematical Law of Probabilities.

2. The extent to which Politics and other outside complications interfere with different classes of stock, and make their possession, as a permanent source of investment, precarious.

3. The extent to which the condition of the Money Market in the different countries or the particular Money Market in which stocks of different countries are mainly dealt in, affects the relative value of stocks of the same class in these different countries by imparting to them either activity or stagnation.